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It may be time to get long rich people. That's right, as stocks hit all-time highs, the wealthiest Americans are getting a real shot in the arm. And after slipping with the broader economy in 2016, high-end discretionary consumption is picking up once again. This is definitely a positive development for the U.S. economy. Here's why.
Central Planning 101: The Wealth Effect
In the wake of the Great Recession, central bankers around the world were captivated by a concept called the "wealth effect." In an effort to stimulate stubbornly low global economic growth, the Fed, ECB, PBoC and BoJ pumped extraordinary amounts of liquidity into their economies, collectively expanding their balance sheets to $18 trillion.
The goal was to ease financial conditions: lowering mortgage rates to make housing more affordable to homeowners; lower corporate bond rates to encourage investment; and, in keeping interest rates low, stimulate the U.S. stock market by nudging return-seeking investors into equities. A rising stock market would boost wealth and create a "virtuous circle" of economic expansion then Fed chairman Ben Bernanke wrote in a November 2010 Washington Post op-ed.
The thinking was not entirely misguided. However, the beneficiaries would not be America's struggling working class but rather elites who were wealthy enough to actually have a portfolio of stocks (more on that in a second).
Bringing this forward to today, "In other words, if you’re in the top 10-20% and you’re long the Nasdaq in 2017 you’re feeling pretty sweet," writes McCullough. If you're in the bottom 90% of American incomes, stock market gains don't matter so much.
Long the Rich
So the wealthy are getting a boost. Think about it. Consider these stats from today's Early Look written by Hedgeye CEO Keith McCullough:
- The S&P 500 is up 16.5% in the past year.
- The wealthiest 10% of American households own 85% of US Financial Assets
- The top 20% of American income earners constitute 40% of US consumer spending
These stock gains are already beginning to show up in the consumption habits of the wealthiest Americans. Luxury goods consumption, teased out of the BEA's report on personal income and outlays, is up +4.6% year-over-year in 2017.
As you can see in the Chart of the Day below, that's an acceleration from last year's paltry 1.2% for luxury goods consumption. Also look at the heady days of 2013 and 2014, when luxury consumption peaked at 6.5% and the S&P 500 was up between 17% and 20%. It's a simple relationship that's picking up again.
So here's the simple takeaway: Get long rich people.
